CalPERS and Carlyle
On February 21 the California Public Employees Retirement System stunned financial markets in Asia when it said it would withdraw its $450 million investments in publicly traded companies in Indonesia, Thailand, the Philippines and Malaysia to comply with new investment guidelines on human rights, labor standards and other political factors.
But the new guidelines don't apply to the fund's substantial investments in private equity markets, including its $475 million stake in the Carlyle Group--nor does CalPERS, the nation's largest public pension fund, see any reason why it should. "I don't have any moral reservations at all" about Carlyle, said Michael Flaherman, chairman of the investment committee of CalPERS.
The $151 billion CalPERS retirement fund, the largest such fund in the world, is invested on behalf of California's 1.2 million state workers and includes $35 billion invested overseas. The fund's relationship with Carlyle began in 1996; over the next four years it invested $330 million in two Carlyle funds, including $75 million in Carlyle Asia Partners. The relationship deepened last spring when CalPERS invested $175 million to buy a 5.5 percent stake in Carlyle. The relationship--so close that CalPERS owns the elegant office building in Washington, DC, where Carlyle's headquarters are located--is far more important to Carlyle than it is to CalPERS, industry analysts said. "CalPERS is called an anchor investor," explained David Snow, editor of PrivateEquityCentral.net, an industry newsletter. "When Carlyle goes to other investors, they can say CalPERS is in."
Carlyle's experience with CalPERS has apparently whetted its appetite for labor pension money. According to an official close to Carlyle, the bank is raising money for a $750 million fund to invest in "worker-friendly companies." Of that total, Carlyle hopes to attract at least $250 million in labor pension money, the official said. Questions about pension fund investments in private equity have become more relevant since the collapse of Enron, with which CalPERS had extensive private business partnerships. Several unions, including the Service Employees International Union (SEIU), strongly opposed the partnerships as well as CalPERS investments in Enron stocks and bonds. Those concerns included Enron's support for energy privatization, its employment of former government officials to lobby for privatization and its sordid human rights record in India. (CalPERS made $133 million from one Enron partnership and may see a gain on another; it lost $105 million on its stock and bond holdings.)
Within the labor movement, CalPERS is highly respected for its cooperation in challenging managers and corporations suspected of violating human rights or abusing workers. In 1999 CalPERS supported two union-backed candidates for the board of Maxxam during a bitter strike by the United Steelworkers of America (USWA). Two years ago CalPERS joined the AFL-CIO in an investors' boycott when the Chinese government and Goldman Sachs took Petrochina, a state-owned oil company, public. The fund's new standards for public investments in emerging markets are the culmination of more than two years of sometimes fierce internal debate. CalPERS investment managers must now consider a wide range of non-economic factors, including a country's political stability, financial transparency and record on labor standards, workers' rights and building democracy. Based on a review by Wilshire Associates, the CalPERS pension consultant, thirteen emerging markets, including Turkey, South Korea and South Africa, passed the test, compared with four that failed. The fund had already banned its managers from investing in publicly traded companies in China and India. "CalPERS is taking more steps in this direction than any pension fund we know about," said Damon Silvers, the AFL-CIO's associate general counsel who focuses on investment strategy.
In December Carlyle sent its three founding partners to Sacramento to brief the CalPERS investment board. One, David Rubenstein, made passing reference to the budding media interest in Carlyle, noting that Carlyle's activities are "visible and under increasing scrutiny." To protect the Carlyle and CalPERS names, he assured the board that Carlyle is "following the highest ethical standards" by "avoiding investments in industries including tobacco, gambling and firearms."
But Carlyle's deep involvement with the military-industrial complex and its ties to the Bush Administration continue to raise questions. Both the SEIU and the Communications Workers of America are collecting information on Carlyle to provide to their pension trustees.
Down the road, Carlyle's investments in Asian companies facing downsizing, manufacturers in China and military conglomerates in Turkey could present serious dilemmas. It's not hard to find contradictions: Carlyle already has investments in China, which is on the CalPERS blacklist for public stock markets, and it is gearing up for more. Liu Hong-Ru, a former official with China's central bank who sits on Carlyle's Asian Advisory Board, is a senior adviser to Petrochina, the company whose public offering CalPERS boycotted in 2000. Until last year, Carlyle was the official adviser to Saudi Arabia's offset program, which allows buyers of US military hardware to use their purchasing power to pressure companies to transfer technology and jobs to their economies. "In effect, Carlyle was telling another country how to leverage their purchases of military equipment in ways that create the most jobs in that country, not this country," said Randy Barber, an expert on offsets at the Center for Economic Organizing in Washington.
Some trade unionists also know from experience that private equity funds aren't the best judge of what constitutes a worker-friendly environment. In 1998 several unions involved with CalPERS were shocked to learn that CalPERS was a partner with a private restructuring fund for Asia run by New York financier Wilbur Ross that played a key role in the suppression of a strike in South Korea. The strike led to the imprisonment of forty Korean trade unionists.
Investors in Carlyle's equity funds include state pension plans in Delaware, Florida, Louisiana, Michigan, New York and Texas, as well as in Los Angeles County. Others are the Ohio Workers Compensation Bureau and Union Labor Life Insurance, a union-run insurance company. According to industry newsletters, union pension funds with significant holdings in private equity markets include SEIU, the USWA, the Hotel and Restaurant Employees, the United Food and Commercial Workers, and the Union of Needletrades, Industrial and Textile Employees.